Directors' pay surges as shares lose value

Boardroom pay has continued to soar despite low inflation and sharp falls in the stock market, according to a new study published today.

The basic salary of FTSE 100 chief executives went up by 14.8 per cent in the year to 30 June. Total pay, including bonuses and long-term incentive payments, rose by 18.3 per cent. The findings were included in the Directors' Pay Report published by Incomes Data Services. They follow an announcement from the Government earlier this month that shareholders are to be given the right to vote on boardroom pay.

The survey shows that the median salary of a FTSE 100 chief executive was £538,000 in the year to 30 June 2001. Total earnings, including bonus and share option profits, were a median £962,000. The figures were lower in FTSE 250 boardrooms, with median chief executive salaries of £300,000 and total annual earnings of £489,000.

Share options formed an important element of directors' pay in most cases. The report found that the average value of gains by directors at the time they exercised their options was £958,000.

The inflation-busting pay rises drew a mixed reaction from business, union and pension fund bodies. The TUC's general secretary John Monks said: "Executives' pay rises show no signs of letting up. Especially in such uncertain economic times, we need to see some boardroom restraint. Forcing companies to hold separate votes on remuneration packages at annual meetings is a very welcome move but it will mean little if institutional investors do not cast their votes."

The National Association of Pension Funds said: "There will be concern among institutional shareholders that pay rises of this order, which clearly outstrip those seen in the economy as a whole, don't seem to comply with the combined code on corporate governance which states that remuneration committees should be sensitive to the wider scene when setting pay."

William M Mercer, a group of human resources consultants, offered a different view. Belinda Hudson, European principal, said: "These numbers are much higher than inflation and the average increases for employees. But they reflect the fact that there is a shortage of proven executives. They also reflect the increasing impact of US-style pay packages as companies compete in an increasingly global market."

Ms Hudson added that salary rises were more modest than bonuses, showing that companies were making boardroom pay more performance-related. She also pointed out that some companies, such as BA and Baltimore Technologies, were cutting pay. "Remuneration committees will be increasingly sensitive to the economic downturn and we will see more action like this," she said.

Incomes Data Services warned of increasing shareholder activism as a result of the "new trend" towards offering directors share options and long-term incentive schemes. IDS said this represented "a break from the past" and was a practice which was "discouraged by both Greenbury and Hampel [who both produced reports on corporate governance]."